A Quiet Guru's Enormous Clout

The views of Jamie Heard's ISS can tip the balance in proxy fights--such as the recent one at HP

Mar. 5, 2002, was a momentous day for Institutional Shareholder Services Inc. After months of poring over documents and listening to company pitches, ISS analysts were ready to deliver their crucial verdict on the most contentious proxy battle in years: Hewlett-Packard Co.'s (HWP ) bid for Compaq Computer Corp. (CPQ ) But when ISS, which advises pension and mutual-fund managers how to vote in proxy disputes, broke the news that it had decided to support the merger, there was one key person who stayed in the background. That was ISS Chief Executive James E. Heard, the most influential, least visible corporate governance expert in America.

At a time when boardroom ethics is the hot-button issue of the day, ISS wields more clout than ever. But while ISS may be in the limelight, Heard certainly is not. It was Vice-President Patrick McGurn and Director of U.S. Research Ram Kumar who faced the reporters and camera crews in March. While they prepped, Heard, who looks more like a college professor than a corporate power broker, made sure the HP report went out by e-mail to clients first. "The people who do the work should get the attention," he says.

Heard may shun the cameras, but don't be fooled: The Louisiana native is the reason investors were hanging on McGurn's and Kumar's words. Over the past decade, Heard, 56, has built ISS from a boutique firm into a profitable, powerful business. With his mild-mannered demeanor, no one would ever call him a rabble-rouser--which is probably why he has been so effective in reconciling shareholder desires with management prerogatives. "Jamie's very cool, very organized in his thinking," says Charles M. Elson, director of the University of Delaware's Center for Corporate Governance.

Today, ISS keeps tabs on 20,000 U.S. and foreign companies for nearly 1,000 corporate and institutional clients. Money managers say its advice can swing as much as 25% of the votes in proxy contests. The privately owned company, in which Heard has a 6% stake, has annual revenues of about $30 million. As Heard tries to keep ISS growing, though, he faces a governance issue of his own. Critics warn that ISS's move into corporate consulting presents potential conflicts of interest, since ISS also evaluates those companies' proxies for its clients.

Until now, Heard has toiled happily in relative obscurity in his office in Rockville, Md. But the public furor over corporate excess, sparked by the demise of Enron Corp., is changing that. The Securities & Exchange Commission has put small-fund managers and investment advisers on notice that they must vote their proxies, and overseas shareholders have also become more active. These days ISS has a near monopoly on the proxy advice business in the U.S. "This is the best opportunity we've had in 20 years to make changes" that strengthen corporate boards and audit committees, Heard says.

Although he doesn't consider himself a shareholder rights advocate--he does not lobby Congress--Heard believes fervently in a system of checks and balances. Fat executive-pay packages, particularly when they go to poor performers, really gall him. "The parade of executives who left Global Crossing with multimillion-dollar payoffs is just obscene," Heard says. He's especially proud that ISS's tough stance on dilution has persuaded some companies to scale back pay plans. "People look to Jamie to crystallize how institutional investors feel," says Kenneth A. Bertsch, director of corporate governance at Teachers Insurance & Annuity Association-College Retirement Equities Fund.

However outraged Heard may be, he has not been one to make provocative gestures. At Harvard in the '60s, where he majored in government, Heard thought the Vietnam War was "immoral and stupid," but he never considered, say, burning his draft card. "We were raging moderates," says Arn Bortz, a former roommate and ex-mayor of Cincinnati. When Heard thought he would be called up, he volunteered for the Navy but was rejected because of a minor medical condition.

Heard became interested in governance issues while studying law at George Washington University. At the nonprofit Investor Responsibility Research Center, he won renown among shareholders for detailing how managements pressured institutions to vote their way. "Practically all the early shareholder activists were educated by Jamie and his troops," says Peg O'Hara, managing director at the Council of Institutional Investors. Heard joined ISS in 1991, at the urging of founder Robert A.G. Monks Sr. and his partner, Nell Minow, both of whom wanted out so they could focus on shareholder activism. After the Monks family sold ISS to Thomson Financial in 1996, Heard and a few colleagues acquired its smaller rival, Proxy Monitor. Last summer, Proxy Monitor bought ISS in a deal valued at $45 million.

These days, Heard spends much of his time trying to develop new business and leaves proxy decisions to a team of 70 analysts. Managing growth without compromising ISS's integrity will be a challenge. Already, some clients fret that ISS became too powerful after its merger. To those worried about ISS's corporate consulting, which now consists mainly of online evaluations of pay plans, Heard replies that a Chinese wall separates analysts from consultants. He adds that ISS recommendations on compensation proxy proposals go against its clients 25% of the time. In June, ISS will unveil a new product: a corporate governance scorecard that will rate companies against their peers on a scale of 1 to 100. But when ISS announces which company ranks lowest, don't expect to hear it from Heard.

By Amy Borrus in Rockville, Md.

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